“Culture is like an ‘invisible hand’ – it is hard to describe and measure but has an incredibly important influence”

Published June 4, 2017

Here is this week’s new CFO Brain interview (check the other pieces from this series). From cloud adoption and organizational culture to international expansion, our conversation with Malcolm Finn, Costa Coffee Global Financial Controller, is definitely worth reading.

Malcolm, who reports directly to the CFO, joined Costa from the global business advisory firm EY where he was a director working with CFOs and the senior finance leadership of listed multinationals.

Arturo: What is the position of Costa Coffee in your industry and which firms are your main competitors?

Malcolm: Costa Coffee is the largest coffeehouse chain in the UK and the second largest globally. Although the obvious competitors are significant coffee house brands, there are also a lot of independent coffee and artisanal coffee shops that are setting up in urban locations. Less obvious competition is also coming from food-led value operators which are improving their coffee offering alongside their food proposition.

However, I would say we differentiate on distinctive coffee and quality at scale and to maintain our market leading brand and position, we continuously focus on innovation at many levels. We roast our own coffee from green beans, and all of our coffee products in every market is 100% Rainforest Alliance Certified. We have invested in new roasting facilities, which also houses our research facilities. We have very exacting standards for the quality of the green beans, and each contract undergoes rigorous structural and sensory quality control tests. Our team of coffee tasters is a massive, intangible asset that you won’t find anywhere on our balance sheet, but by way of example of value, our Coffee taster Gennaro Pelliccia has had his tongue insured for £10 million with Lloyd’s of London.

Ethical sourcing has always been important for us, and we are continually investing in the future of the business. Innovation is at the product level and also at store level. However, I believe innovation now needs to look more widely at how we provide a distinctive experience for our customers (the human experience). We are constantly trialling new store concepts and food ranges and evaluating the ways people make exchanges with the brand and the people.

What are the priorities for your business and how is the finance function helping to achieve them?

Consumption of coffee has changed over the years. We have a number of business models at Costa Coffee including our stores (which are a mix of equity and franchise), our market leading Costa Express business (premium self-service) that uses fresh coffee beans and fresh milk, our B2B, and wholesale. We operate significant franchises around the world and JVs in China. Finance has a big role to play in investment decisions and growing in a controlled and compliant way.

Our most important business priorities are international growth, innovation and efficiency. Focusing on the first one, even though we are a truly global business, with a presence in 29 countries outside the UK, we may not be very deep in some of them. A considerable proportion of our business is still UK-based, and that’s why for us, big growth will be in key international markets.

I would highlight China as a key market we have chosen to invest in due to the scale of the opportunity. We have around 400 stores in China and are looking to build on this foundation. If we get China right at speed, it would be significant for us.

Finance also has a great importance regarding growth, expansion and innovation imperatives. I think the CFO and the finance team have become the dominant logic in the organisation as well as the voice of the company in investor relations and communications with the board. We are always looking at new investment, capital allocation, new markets; we’re always looking ahead with the business.

And what are your plans in the Chinese markets?

For China, our thinking is to unlock the market potential – the scale and growth expected to be driven by the expanding middle class and evolving tastes. Key will be a focus on the major cities with the highest potential, a step change in the brand recognition as well as continuing to develop a compelling proposition. We are also looking at our Express business as another consumer channel in China.

We aim to become the clear number 2 in China, and we have recently invested in innovation and a brand with what we call “Hothouse Stores” and there has been associated strengthening of like for likes. This is a new store concept where we showcase innovative and distinctive food offerings; putting significant emphasis in the way the stores are laid out -through our London themes. I think the Chinese market is very brand conscious, and we want to be seen in the right places. So we are working to understand that market and are trying to grow through localisation coupled with a more focused property strategy.

And coming back to the other priorities, how is innovation related to the finance function?

First, I would mention that innovation is to a great extent linked to the new opportunities that digitalization is bringing to our industry. As a hospitality and retail business, we are investing a lot in our digital journey to improve our customers’ experience; particularly through personalisation and data analytics. For example, we are investing into ‘order and collect’ so you can order coffee on a device on the way to a store and just collect it at the till. We are also trying to let the customer order in the store without leaving the table using the same technology.

Regarding convenience, we are investing in new tills across our estate (conversational ordering) and new ovens which allow a greater range of food offerings.

Convenience and analytics can get you so far but are easily imitable. I have spoken about another phenomenon that we see: people choose to enter a coffee store increasingly for reasons other than the steadfast reasons of the past. To me, a common theme for these “other” reasons to choose is about relationships – with the brand, people, and society – a recognition of needs and values. I would suggest everything that makes you feel treated as a person and feel like things are arranged around you rather than fitting into a rigid format is a differentiator. Making the client have an experience of autonomy, agency, and pleasure is distinctive, and finance supports all the investment process.

Innovations from the client experience standpoint are taking place in parallel to business change transformations. We have invested in very high tech roastery that should serve our business for the next 20 years in terms of production capacity. We are also investing in new finance (ERP) systems moving to the cloud, which should have a significant impact on frictionless transactions and speed and intelligent reporting.

So, these infrastructure business change projects are finance-led when they consist on improving finance systems. When these changes impact finance or finance reporting, we have a very strong voice on leading such transformation, since we need to review and to understand many investments in digital or in more intangible assets, and think how we can get returns on them.

I assume that efficiency is then the priority most directly linked to your department…

Exactly. As a group, we have committed to £150m of efficiency savings over the next 5 years. Efficiency clearly is going to be finance-led (or CFO-led). To achieve all this, we need to align the strategic aims to culture, process and capabilities and talent. And be thinking ahead.

Is culture really linked to strategy and performance?

I comment quite a lot in articles and with the media on organisational culture. When I was working as a change, strategic renewal and transformation consultant, I became fascinated with human performance, mental well-being, organisational culture and organisational health.

I believe culture has a phenomenal impact on performance and organisational health – and to achieve any planned strategy all people have to be aligned. I have described culture as the “invisible hand” – it is hard to describe and measure but has an incredibly important influence.

There is an increasing responsibility for leadership to understand how culture influences decision making fully. One of the key risks is rationalising unfavourable decisions, and there should be a tone from the top for “speaking up”.

The other dimension to consider is how finance’s culture interacts with the multitude of dimensions and dynamics that exist across the wider organisational culture. A finance function that is hyper-connected across the organisation and can work more effectively within the diverse aspects of the larger organisational culture can add competitive advantage.

Culture is key to a business’ ability to intelligently develop and implement the right strategy to weather the uncertainty in the market.

You mentioned that you are in the process of moving your infrastructure to the cloud. What are the most obvious advantages you expect from this change?

Yes. Moving to the cloud will allow us to have the most up-to-date software, world-class processes, and better insights and data reporting that can help us to scale and to design things appropriately for the size, complexity and scale of our business. This is key since we have been and are a very high-growth business.

How will the role of the CFO evolve in the medium term?

I think the CFO is probably a bit of a misnomer these days since although you are a financial officer, you are also a chief officer or a chief leader in a lot of other functions. In many companies, the CFO is leading IT or strategy and even sometimes HR. So the CFO is “chiefly finance” but not exclusively.

Besides, the role of the CFO has apparently evolved towards the support of the CEO. Often their roles are increasingly overlapping since the CFO is becoming much more strategic. The CFO and the finance team are the dominant logic and voice for the company, from investor relations to board communications. In Costa Coffee, the CFO is driving a lot of business performance and growth, as well as non-traditional capabilities.

I totally agree with these expressions. Again, I think this role is becoming wider, and CFOs must become leaders that create and sustain a culture of curiosity among the organisation, especially in uncertain times. CFOs need to respond well to uncertainty by being both anticipatory and responsive as well as a logical voice for decisions on, for instance, investment.

As an example of value integration, we are working on cross functionally to manage price risk (e.g. commodity), integrating treasury, procurement, and my team. I think the CFO role will get broader, increasingly having an eye looking forward, focusing on horizon scanning (what are the issues ahead), and thinking how to gather the right teams to deliver value and supporting the business with all those strategic objectives.

I think the role of finance leadership creating a culture of curiosity and learning, to stay agile and responsive is a key factor in being resilient under conditions of extreme uncertainty.

How would you compare the role of a financial controller in a mid-size company with your position as global financial controller of Costa Coffee?

Costa Coffee is a truly global business. The UK is, however, a very key and important part of our business. Our organisation and my team are not centralised due to out need to have local expertise in all of our major markets, which are separated geographically and by time differences. I do need to tap into the finance teams in other regions. So, on the one hand, I do partner with all financial directors in all these territories and business units – to understand what is going on in all markets – while on the other hand, I’m trying to think ahead, assessing the emerging risks with new markets we could potentially enter. I think therefore there is a need to think deep locally in the UK and broadly in other territories. Perhaps a key difference is a constant flexibility in thinking and approach – telescope/ microscope – due to the scale, breadth, depth and complexity of the operations.

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